In response to the highest rates of inflation in decades, central banks are raising interest rates. Although inflation is still unusually high, the inflation rate is slowing down. However, raising interest rates has triggered recessions in the past, leading many to ask how to prepare for a recession.
We previously wrote about ways to grow wealth during a financial crisis, but sound financial planning requires both offensive and defensive strategy— sometimes you have to go into “survival mode” and focus on preserving your wealth. It’s not always about how much money you make – sometimes it’s about how well you can protect your wealth from losses. This is especially the case in times like these, where it is unclear what exactly is going on.
Many investments like stocks and mutual funds become increasingly risky during recessions. This is the case with any asset class that depends on economic activity. Higher interest rates mean less investment, employment, and consumption, which leads to lower employment, prices, and corporate earnings.
When coupled with persistently high inflation, this is a nightmare scenario known as stagflation— savings and investments get attacked by both inflationary and deflationary pressure at the same time. Presently, raising interest rates appears to be pushing inflation down as intended, but it remains to see if it will be enough.
So with interest rates on the rise worldwide, it seems that a recession may very well be on the horizon. So how can you protect yourself and your family by protecting your wealth?
Certain kinds of value stocks have traditionally performed well in recession, especially in the health care, utilities, defense, and retail sectors. However, it’s important to consider that the performance of these stocks is measured over the long term.
Even healthy companies can experience short term declines in their share price, and if you are forced to sell for some reason, this can easily mean selling at a loss. This means that investing in stocks during a recession makes more sense for people who are sure that they will be able to hold their investments over a long period of time.
The same applies for real estate, and this is especially true with higher interest rates. Lower employment and higher interest rates mean fewer people are buying real estate, meaning prices decline.
So if you have lots of extra money, recessions can be a good time to pick up stocks or real estate at cheap prices and ride it out until things settle down. If you’re forced to sell due to unforeseen medical expenses or other emergencies, however, you could face a serious loss.
Looking at all kinds of recessions around the world, the only consistently strong performer throughout a recession is precious metals.
Silver and Gold have typically seen price rises in past recessions. During the 1973 recession in the US, the gold price increased by 87%. In the recession that followed the 2007 subprime mortgage crisis, gold gained over 16%. In the aftermath of the dotcom bubble of 2000, gold gained around 5%.
In other recessions, precious metals did not see major rallies; however, precious metal prices almost always remained steady. In 1981, gold went up only 1.6% during the recession, and in 1990 it went up just 0.1%.
In only one US recession in recent memory did gold prices go down— in 1980 gold dropped by 5.5% during a short recession.
The silver price generally follows the gold price, but silver can be more affected by industrial demand, since there are more industrial uses for silver. This has caused silver prices to go down in the beginning of some recessions and recovered later on.
In the 1970’s, silver prices saw a gradual rise after the recession. In the 1980’s recession, the price initially dipped, but recovered. During the 1990’s recession, the price saw a slight decline. In the recession after the dotcom bubble, price remained steady, and in the sub-prime crisis and the COVID recession, silver saw steep price increases. We attribute this to the growing number of industrial uses for silver.
The historical record shows that precious metals, especially silver and gold, are the best options for preserving the value of money during a recession. There is a significant possibility that the value could go up, and this is especially true in times of high inflation.
However, even if prices remain relatively flat or decline slightly, precious metals are historically much less risky than any other asset out there. This has held true not just in recent history, but going back to Roman times.
The rise of tokenized silver and gold could have a further impact on silver price. Blockchain-based silver ownership has a number of advantages that neither bullion nor ETFs have.
Blockchain-based tokens can be sent anywhere in the world, instantly and securely. This makes it easy to transport or conceal them during volatile political and economic times.
Blockchain-based Silver Tokens can also be purchased, sold, and traded with a high degree of anonymity. They can be easily transferred without any governmental approval. This makes them ideal for people living in countries with totalitarian regimes where wealth confiscation and draconian capital controls are a problem, this problem will grow as governments look for more ways to tax their people.
With inflation wreaking havoc around the world, people are looking for alternatives. Blockchain-based US dollar tokens have seen a massive surge in popularity lately, but there are fears about the dollar losing its world reserve currency status.
If the dollar does see a major decline, as many analysts predict, there could be a huge surge of demand for alternatives. Silver and gold were a natural choices in the past, so it’s likely that both investors and ordinary savers will turn to them again.
The versatility and security of blockchain-based tokens could make silver very appealing to a broad new range of investors and consumers. A revival of metal currencies on the blockchain is not impossible, and this surge in demand also has the potential to drive up prices.
It remains to be seen what kind of recession or depression, if any, will occur. In any case, silver is one of the safest ways of storing wealth in all foreseeable scenarios.